Hello readers! Welcome to this blog which is primarily focused on discussing the entire spectrum of the stock market. We will be focusing on the Indian equity markets and it two principal indices the BSE SENSEX and NIFTY 50. Through this blog we will learn a few basic definitions, understand the working and get acquainted with some terminology relating to the stock market. We will move from understanding the markets to selecting stocks that we help us multiply our wealth. Today we just start off with the basics and understand the way the market’s function and the two basic types of analysis that market participant use. Let’s get started.
THE STOCK MARKET
A stock market, equity market or share market is the aggregation of buyers and sellers; a loose network of economic transactions, not a physical facility or discrete entity of stocks which represent ownership claims on businesses; these may include securities listed on a public stock exchange, as well as stock that is only traded privately, such as shares of private companies which are sold to investors through equity crowdfunding platforms.
Investment in the stock market is most often done via stockbrokerages and electronic trading platforms. Investment is usually made with an investment strategy in mind. In other words, the stock market refers to the collection of markets and exchanges where regular activities of buying, selling, and issuance of shares of publicly held companies take place.
Such financial activities are conducted through institutionalized formal exchanges or over the counter (OTC) marketplaces which operate under a defined set of regulations. There can be multiple stock trading venues in a country or a region which allow transactions in stocks and other forms of securities.
While both terms – stock market and stock exchange – are used interchangeably, the latter term is generally a subset of the former. If one says that she trades in the stock market, it means that she buys and sells shares/equities on one (or more) of the stock exchange(s) that are part of the overall stock market.
The leading stock exchanges in the U.S. include the New York Stock Exchange (NYSE), Nasdaq, the Better Alternative Trading System (BATS) and the Chicago Board Options Exchange (CBOE). The leading stock exchange in India is the Bombay stock exchange (BSE) and National stock exchange (NSE).
These leading national exchanges, along with several other exchanges operating in the country, form the stock market of the U. S. Though it is called a stock market or equity market and is primarily known for trading stocks/equities, other financial securities – like exchange traded funds (ETF), corporate bonds and derivatives based on stocks, commodities, currencies, and bonds – are also traded in the stock markets.
UNDERSTANDING THE STOCK MARKET-
While today it is possible to purchase almost everything online, there is usually a designated market for every commodity. For instance, people drive to city outskirts and farmlands to purchase Christmas trees, visit the local timber market to buy wood and other necessary material for home furniture and renovations, and go to stores like Walmart for their regular grocery supplies.39 Such dedicated markets serve as a platform where numerous buyers and sellers meet, interact and transact.
Since the number of market participants is huge, one is assured of a fair price. For example, if there is only one seller of Christmas trees in the entire city, he will have the liberty to charge any price he pleases as the buyers will not have anywhere else to go. If the number of tree sellers is large in a common marketplace, they will have to compete against each other to attract buyers.
The buyers will be spoiled for choice with low- or optimum-pricing making it a fair market with price transparency. Even while shopping online, buyers compare prices offered by different sellers on the same shopping portal or across different portals to get the best deals, forcing the various online sellers to offer the best price. A
stock market is a similar designated market for trading various kinds of securities in a controlled, secure and managed the environment.
Since the stock market brings together hundreds of thousands of market participants who wish to buy and sell shares, it ensures fair pricing practices and transparency in transactions. While earlier stock markets used to issue and deal in paper-based physical share certificates, the modern-day computer-aided stock markets operate electronically.
TYPES OF ANALYSIS-
- Fundamental analysis in fundamental research, you try to find out value of an equity share using the information provided in the financial statements of the company. The investor tries to analyse various aspects of the business-like competitive advantage, financial soundness, quality of management and competition. The main aim is to ascertain the relative attractiveness of the underlying business. Here, it is assumed that the market price does not reflect the true value of the company due to some uncontrollable external factors like investor sentiments.
As the market will attain equilibrium, the real value will be equal to its market price in the long run. It believes that paying a higher price for a stock will affect return on investment adversely. Thus, by 41 means of financial ratios, investors try to arrive at the true value at which a stock should ideally trade in the market.
- Technical analysis is Technical research that relates to the study of past stock prices to predict the trend of prices in future. It shows you the direction of movement of the share prices. With the help of technical research, you can identify whether there will be sharp rise or fall in the price of share. It is not dependent on recent news or events which has already been incorporated in the price of the share. As the stock prices are dependent on investor psychology which keeps changing according to news and events, technical research emphasises the use of Stop-losses. It will save investors from suffering a big loss in future.
Technical research gives meaningful results only for stocks which are high in demand and traded in huge volumes. Technical research uses different types of charts like bar chart, candlestick chart; to understand the pattern of stock prices. Daily charts are used by short term traders to examine the immediate movement in the stock prices. Weekly / monthly charts are used by medium/long term traders to ascertain the probability to earn higher more in the long run.
I would like to wrap up this session with the following point-
A point to note that in general out of 100 people in the market, 90% use fundamental analysis to create wealth and 10% use technical analysis. Fundamental analysis requires a lot of training, knowledge and experience and can be difficult to grasp. On the other hand, technical analysis requires more of experience and patience and is easy to understand.
Hope to see you in the next Blog.